DP13254 | Are Banking and Capital Markets Union Complements? Evidence from Channels of Risk Sharing in the Eurozone

Publication Date

10/18/2018

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Abstract

The interplay of equity market and banking integration is of first-order importance for risk sharing in the EMU. While EMU created an integrated interbank market, "direct'' banking integration (in terms of direct cross-border bank-to-real sector flows or cross-border banking-consolidation) and equity market integration remained limited. We find that direct banking integration is associated with more risk sharing, while interbank integration is not. Further, interbank integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both.